Wci Communities 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 001-31255

WCI COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation
or organization) 59-2857021
(I.R.S. Employer Identification No.)

24301 Walden Center Drive
Bonita Springs, Florida 34134

(Address of principal executive offices) (Zip Code)
(239) 947-2600
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yesþ Noo

The number of shares outstanding of the issuer’s common stock, as of July 29, 2005, was 45,326,176.

WCI COMMUNITIES, INC.

Form 10-Q

For the Quarter Ended June 30, 2005

INDEX

	Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets June 30, 2005 (Unaudited) and December 31, 2004		1
Condensed Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004		2
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2005 and 2004		3
Notes to Condensed Consolidated Financial Statements (Unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		28
Part II. Other Information
Item 1. Legal Proceedings		29
Item 4. Submission of Matters to a Vote of Shareholders		29
Item 6. Exhibits		29
SIGNATURE
Certifications
EX-3.2: AMENDED AND RESTATED BY-LAWS
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WCI COMMUNITIES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

	June 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Cash and cash equivalents	$	67,534		$	101,973
Restricted cash		172,809			158,694
Contracts receivable		1,092,912			758,406
Mortgage notes and accounts receivable		75,083			93,130
Real estate inventories		1,737,443			1,477,966
Property and equipment		208,970			176,589
Other assets		127,870			106,868
Goodwill		62,946			51,567
Other intangible assets		7,319			7,199
Total assets	$	3,552,886		$	2,932,392
Liabilities and Shareholders’ Equity
Accounts payable and other liabilities	$	475,545		$	446,392
Customer deposits		542,256			382,610
Community development district obligations		48,238			48,950
Senior unsecured credit facility		255,700			190,730
Mortgages and notes payable		237,560			150,238
Senior subordinated notes		860,903			678,321
Contingent convertible senior subordinated notes		125,000			125,000
		2,545,202			2,022,241
Minority interests		14,114			16,340
Commitments and contingencies		—			—
Shareholders’ equity:
Common stock, $.01 par value; 100,000 shares authorized, 46,001 and 45,305 shares issued, respectively		460			453
Additional paid-in capital		295,993			288,122
Retained earnings		705,199			613,318
Treasury stock, at cost, 693 shares, respectively		(8,082	)		(8,082	)
Total shareholders’ equity		993,570			893,811
Total liabilities and shareholders’ equity	$	3,552,886		$	2,932,392

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

WCI COMMUNITIES, INC.

Condensed Consolidated Statements of Income

(In thousands, except per share data)
(unaudited)

	For the three months ended						For the six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues
Homebuilding	$	501,086		$	276,295		$	901,632		$	493,394
Real estate services		49,688			41,500			87,608			70,271
Other		119,881			14,224			147,279			33,667
Total revenues		670,655			332,019			1,136,519			597,332
Cost of Sales
Homebuilding		396,269			204,646			709,781			365,521
Real estate services		40,243			33,771			72,076			58,343
Other		45,378			15,704			73,016			31,314
Total cost of sales		481,890			254,121			854,873			455,178
Gross margin		188,765			77,898			281,646			142,154
Other Income and Expenses
Equity in losses (earnings) from joint ventures		39			220			(1,096	)		(726	)
Other income		(1,031	)		(8,608	)		(3,954	)		(16,626	)
Hurricane recoveries, net		(1,055	)		—			(1,861	)		—
Selling, general and administrative		56,536			39,129			106,103			75,961
Interest expense, net		1,606			10,144			15,760			18,534
Real estate taxes, net		4,530			3,091			8,554			5,594
Depreciation and amortization		3,896			3,280			7,573			6,501
Expenses related to early repayment of debt		1,519			—			1,519			—
Income before minority interests and income taxes		122,725			30,642			149,048			52,916
Minority interests		653			(839	)		(126	)		(839	)
Income before income taxes		122,072			31,481			149,174			53,755
Income tax expense		46,770			12,365			57,293			21,091
Net income	$	75,302		$	19,116		$	91,881		$	32,664
Earnings per share:
Basic	$	1.67		$	.43		$	2.04		$	.74
Diluted	$	1.61		$	.42		$	1.95		$	.72
Weighted average number of shares:
Basic		45,199			44,071			45,027			43,893
Diluted		46,915			45,736			47,037			45,607

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

WCI COMMUNITIES, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)
(unaudited)

	For the six months ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	91,881		$	32,664
Adjustments to reconcile net income to net cash used in operating activities:
Tax benefit relating to stock options		2,007			—
Deferred income taxes		9,250			5,051
Depreciation and amortization		9,081			7,917
Earnings from investments in joint ventures		(1,096	)		(726	)
Minority interests		(126	)		(839	)
Stock-based compensation expense		760			688
Changes in assets and liabilities:
Restricted cash		(13,368	)		(16,997	)
Contracts receivable		(334,506	)		145,835
Mortgage notes and accounts receivable		21,147			28,535
Real estate inventories		(110,424	)		(227,583	)
Other assets		(14,996	)		(21,764	)
Accounts payable and other liabilities		8,549			(68,503	)
Customer deposits		144,142			(5,862	)
Net cash used in operating activities		(187,699	)		(121,584	)
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired		(136,372	)		(53,517	)
Additions to property and equipment, net		(19,368	)		(24,865	)
Distributions from (contributions to) investments in joint ventures		1,252			(580	)
Net cash used in investing activities		(154,488	)		(78,962	)
Cash flows from financing activities:
Net borrowings on senior unsecured credit facility		64,970			87,000
Proceeds from borrowings on mortgages and notes payable		158,181			286,055
Repayment of mortgages and notes payable		(100,083	)		(195,052	)
Proceeds from issuance of senior subordinated notes		200,000			—
Redemption of a portion of 10 5/8 senior subordinated notes		(17,000	)		—
Debt issue costs		(2,391	)		(2,959	)
Advances on community development district obligations		6,288			1,430
Payments on community development district obligations		(5,228	)		(1,508	)
Distributions to minority interests		(2,100	)		(3,050	)
Proceeds from exercise of stock options		5,111			3,216
Net cash provided by financing activities		307,748			175,132
Net decrease in cash and cash equivalents		(34,439	)		(25,414	)
Cash and cash equivalents at beginning of period		101,973			95,005
Cash and cash equivalents at end of period	$	67,534		$	69,591
Non-cash activity:
Real estate inventories transferred to property and equipment	$	19,844		$	—
Property and equipment transferred to real estate inventories		—			17,602
Notes payable in connection with land acquisitions		19,224			—
Community development district obligations assumed by end user		2,221			1,310
Issuance of common stock in connection with acquisition		—			10,000
Issuance of note payable in connection with acquisition		10,000			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2005
(In thousands, except per share data)

1.	Basis of Presentation
	The condensed consolidated financial statements include the accounts of WCI Communities, Inc. (the Company), its wholly owned subsidiaries and certain joint ventures in which the Company has the ability to exercise control. The equity method of accounting is applied in the accompanying condensed consolidated financial statements with respect to those investments in joint ventures in which the Company has less than a controlling interest, has substantive participating rights, or is not the primary beneficiary as defined in FIN 46-R, Consolidation of Variable Interest Entities. All material intercompany balances and transactions are eliminated in consolidation.
	The condensed consolidated financial statements and notes of the Company as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 have been prepared by management without audit, pursuant to rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the December 31, 2004 audited financial statements contained in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all normal, recurring adjustments necessary for the fair presentation of such financial information have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
	In May 2005, we closed on the sale of a parcel in Jupiter, Florida for $100,000 in revenue and $76,600 in gross margin resulting in an increase in land sales revenues and gross margin for the three and six months ended. Land sales are expected to continue in the future, but will vary significantly in amount and timing. Historically, the traditional homebuilding segment delivers 40% to 50% of its revenue and gross margin in the fourth quarter. The Company historically has experienced and expects to continue to experience variability in quarterly results. The consolidated statements of income for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.
	Effective April 1, 2005, the Company revised its calculations of capitalized interest with respect to its traditional homebuilding and tower inventories, as prescribed by Statement of Financial Accounting Standards No. 34,Capitalization of Interest Cost. The Company now includes the underlying developed land costs in its calculation of capitalized interest for tower residences under construction, and includes the underlying developed land costs and in-process homebuilding costs in its calculation of capitalized interest for traditional homes under construction. Capitalization ceases upon substantial completion of each home or tower. The effect of the revision was to increase net income for the three months ended June 30, 2005 by approximately $4,800 or $0.11 per diluted share, of which approximately $3,300 or $0.07 per diluted share relates to the cumulative effects as of April 1, 2005. In addition, homebuilding and tower cost of sales for the three months ended June 30, 2005 includes approximately $4,400 and $2,700, respectively, of previously capitalized interest related to homes closed and tower residences under construction, due to this revision.
2.	Stock-Based Compensation
	The Company has elected to account for stock-based compensation using the intrinsic value method described in APB Opinion 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations. No compensation costs are recorded upon issuance of stock options as the options were issued at the current market price of the stock on the date of grant. However, for stock grants, compensation expense equal to the market price of the underlying stock on the grant date, or the market price remeasured at

4

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

the reporting date for a variable stock compensation plan, is recognized ratably over the vesting period. Had the Company elected to recognize compensation expense under the fair value method under SFAS 123, pro forma net income would be as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income:
As reported	$	75,302		$	19,116		$	91,881		$	32,664
Add: Stock-based compensation expense included in reported net income, net of tax		310			—			466			—
Less: Total stock-based compensation expense, net of tax		(1,084	)		(610	)		(2,168	)		(1,221	)
Pro forma	$	74,528		$	18,506		$	90,179		$	31,443
Earnings per share:
As reported
Basic	$	1.67		$	.43		$	2.04		$	.74
Diluted	$	1.61		$	.42		$	1.95		$	.72
Pro forma
Basic	$	1.65		$	.42		$	2.00		$	.72
Diluted	$	1.59		$	.41		$	1.94		$	.70

	These pro forma amounts may not be representative of the effect on pro forma net income in future years, since the estimated fair value of stock options is amortized over the vesting period and additional options may be granted in future years.
	In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, Share-Based Payment (SFAS 123R), which is a revision of SFAS 123 and supersedes APB 25 and SFAS 148. This statement requires companies to record compensation expense for share-based payments to employees, including grants of stock options, at fair value. SFAS 123R is effective for public companies at the beginning of the first fiscal year beginning after June 15, 2005. The Company believes the initial implementation of SFAS 123R will not have a material impact on its financial statements.
3.	Segment Information
	The Company operates in three principal business segments: Tower Homebuilding; Traditional Homebuilding, which includes sales of lots; and Real Estate Services, which includes real estate brokerage, mortgage banking and title operations. Amenity Membership and Operations and Other, and Land Sales have been disclosed for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.

5

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

Three months ended June 30, 2005

							Real		Amenity
	Tower		Traditional				Estate		Membership and					Segment
	Homes		Homes		Lots		Services		Operations and Other			Land Sales		Totals
Revenues	$	228,889	$	259,523	$	12,674	$	49,688	$	19,881		$	100,000	$	670,655
Gross margin		60,187		41,890		2,740		9,445		(2,114	)		76,617		188,765
Previously capitalized interest included in costs of sales		8,382		7,733		1,080		—		—			4,942		22,137

Three months ended June 30, 2004

								Real		Amenity
	Tower		Traditional					Estate		Membership and					Segment
	Homes		Homes		Lots			Services		Operations and Other			Land Sales		Totals
Revenues	$	145,211	$	130,992	$	92		$	41,500	$	13,539		$	685	$	332,019
Gross margin		46,572		25,089		(12	)		7,729		(1,503	)		23		77,898
Previously capitalized interest included in costs of sales		3,307		1,659		53			—		4			65		5,088

Six months ended June 30, 2005

							Real		Amenity
	Tower		Traditional				Estate		Membership and					Segment
	Homes		Homes		Lots		Services		Operations and Other			Land Sales		Totals
Revenues	$	442,413	$	440,287	$	18,932	$	87,608	$	47,279		$	100,000	$	1,136,519
Gross margin		117,418		69,505		4,928		15,532		(2,323	)		76,586		281,646
Previously capitalized interest included in costs of sales		13,083		10,495		1,562		—		22			4,942		30,104

Six months ended June 30, 2004

							Real		Amenity
	Tower		Traditional				Estate		Membership and				Segment
	Homes		Homes		Lots		Services		Operations and Other		Land Sales		Totals
Revenues	$	283,876	$	207,379	$	2,139	$	70,271	$	29,980	$	3,687	$	597,332
Gross margin		86,145		40,749		979		11,928		669		1,684		142,154
Previously capitalized interest included in costs of sales		6,895		2,922		85		—		29		201		10,132

See the condensed consolidated statements of income for a reconciliation of total gross margin to income before minority interests and income taxes for the three and six months ended June 30, 2005 and 2004.

6

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

4.	Real Estate Inventories
	Real estate inventories are summarized as follows:

	June 30,		December 31,
	2005		2004
Land and land improvements	$	811,805	$	791,882
Investments in amenities		90,882		112,864
Work in progress:
Towers		225,113		168,351
Homes		492,557		297,230
Completed inventories:
Towers		40,218		57,666
Homes		76,868		40,435
Real estate inventories owned		1,737,443		1,468,428
Real estate inventories not owned		—		9,538
Total real estate inventories	$	1,737,443	$	1,477,966

	Work in progress includes tower units and homes that are finished, sold and ready for delivery and tower units and homes in various stages of construction. Completed inventories consist of model homes used to facilitate sales and tower units and homes that were not subject to a sales contract. Excluding model homes, we had approximately 53 and 27 completed single- and multi-family homes at June 30, 2005 and December 31, 2004, respectively. We had 43 and 84 completed tower residences at June 30, 2005 and December 31, 2004, respectively.
5.	Warranty
	The Company provides its single- and multi-family home buyers with a one to three year limited warranty, respectively, for all material and labor and a ten year warranty for certain structural defects. The Company provides its tower home buyers a three year warranty for the unit and common elements of the tower.
	Since the Company subcontracts its traditional and tower homebuilding work to subcontractors who provide it with an indemnity, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors. Warranty reserves for amounts that may be paid by the Company have been established by charging cost of sales and crediting a warranty liability. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs. The Company’s warranty cost accruals are based upon historical warranty cost experience and are adjusted as appropriate to reflect qualitative risks associated with the types of towers and homes built.

7

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

The following table presents the activity in the Company’s warranty liability for the six months ended June 30, 2005:

Warranty liability at December 31, 2004	$	10,577
Warranty liability assumed in acquisition		745
Warranty costs accrued		7,283
Warranty costs paid		(5,022	)
Warranty liability at June 30, 2005	$	13,583

6.	Interest Expense, net
	The following table is a summary of interest expense, net:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Total interest incurred	$	26,745		$	19,942		$	49,760		$	39,230
Debt issue cost amortization		976			843			1,926			1,685
Interest capitalized		(26,115	)		(10,641	)		(35,926	)		(22,381	)
Interest expense, net	$	1,606		$	10,144		$	15,760		$	18,534
Previously capitalized interest included in costs of sales	$	22,137		$	5,088		$	30,104		$	10,132

Interest capitalized in the three and six months ended June 30, 2005 includes approximately $7,855 related to the revised calculations described in Note 1. Cost of sales for the three and six months ended June 30, 2005 includes approximately $7,100 of additional costs as a result of the revised calculations.

7.	Variable Interest Entities
	As defined in Financial Accounting Standards Board Interpretation 46-R (FIN 46-R), Consolidation of Variable Interest Entities (VIEs), an interpretation of ARB 51, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.
	Under the non-special-purpose entity provisions of FIN 46-R, the Company has concluded that whenever it options land or lots from an entity and pays a non-refundable deposit or enters into a partnership arrangement, a VIE may be created. If the Company is deemed the primary beneficiary of these arrangements, it would be required to consolidate the VIE. For the six months ended June 30, 2005, the Company evaluated its option contracts for land and lots and determined it was not the primary beneficiary of these option contracts as defined by FIN 46.

8

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

8.	Shareholders’ Equity
	In May 2005, the Company filed a shelf registration statement with the Securities and Exchange Commission which as of June 30, 2005 was effective under the Securities Act of 1933, as amended. Under the shelf registration statement, the Company may offer from time to time up to $1.0 billion of debt securities, common stock and/or preferred stock.
	In addition to its common stock, the Company has 100,000 shares authorized of series common stock, $.01 par value per share, and 100,000 shares authorized of preferred stock, $.01 par value per share. No shares of series common stock or preferred stock are issued and outstanding.
	Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of convertible debt, stock options and grants. For the three months ended June 30, 2005 and 2004, 677 and 0 stock options, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.
	Information pertaining to the calculation of earnings per share is as follows:

	For the three months ended				For the six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Basic weighted average shares outstanding		45,199		44,071		45,027		43,893
Dilutive common share equivalents:
Employee stock options, restricted stock and performance stock grants		1,397		1,665		1,561		1,714
Contingent convertible senior subordinated notes		319		—		449		—
Diluted weighted average shares outstanding		46,915		45,736		47,037		45,607

9.	Debt
	The Company’s Board of Directors has authorized the repurchase of up to $50,000 of the 10 5/8% senior subordinated notes due 2011 (the Notes). During the quarter ended June 30, 2005, the Company repurchased $17,000 principal amount of the Notes. The Company recognized expenses related to this debt redemption of approximately $1,519, which primarily represented the purchase premium above par value.
	In March 2005, the Company issued $200,000 of 6-5/8% senior subordinated notes (the Notes) in a private placement. During the quarter ended June 30, 2005,the Company completed the exchange of the Notes for notes (the Exchange Notes) registered under the Securities Act of 1933, as amended. The Exchange Notes have substantially identical terms as the Notes. The Exchange Notes mature March 15, 2015 and interest is payable semi-annually in arrears commencing on September 15, 2005. The Exchange Notes are subordinated to all existing and future senior debt. The Exchange Notes’ indenture contains certain financial and operational covenants that may limit the Company’s and its subsidiaries’ ability to incur additional debt, pay dividends, repurchase capital stock and make certain restricted investments. Proceeds from the offering were used to repay approximately $199,000 of the outstanding balance under the senior unsecured credit facility.

9

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands, except per share data)

10.	Commitments and Contingencies
	Standby letters of credit and performance bonds, issued by third party entities, are used to guarantee the Company’s performance under various contracts, principally in connection with the development of our projects and land purchase options. At June 30, 2005, the Company had approximately $55,142 in letters of credit outstanding which expire at various dates through 2007. Performance bonds do not have stated expiration dates; rather, the Company is released from the bonds as the contractual performance is completed. These bonds, which approximated $118,982 at June 30, 2005, are typically outstanding over a period of approximately one to five years.
11.	Acquisition
	On February 17, 2005, the Company acquired Renaissance Housing Corporation (Renaissance), a homebuilder and high-rise tower developer that currently operates in Virginia and Maryland. Cash invested in Renaissance included consideration paid to the seller of approximately $89,000, plus the repayment of approximately $51,000 in indebtedness on the day of closing, excluding acquisition costs and net of acquired cash of approximately $8,300. The Company recorded an initial amount of goodwill of approximately $9,100, which was assigned to our Traditional Homebuilding operating segment. In accordance with the purchase agreement, during the quarter ended June 30, 2005, the seller exercised a 60-day post-closing date clause in the purchase agreement requiring the Company to pay additional consideration of approximately $1,970. The additional consideration was paid in June 2005 and recorded as goodwill. In addition, contingent payments tied to the earnings of the acquired business unit may be earned and paid over three years following the acquisition and would be recorded as goodwill when earned.
	In connection with the acquisition, the Company entered into a non-interest bearing $10,000 promissory note payable to the seller. The promissory note is collateralized by a certain land parcel located in Virginia. In accordance with the terms of the purchase contract and promissory note, depending upon the seller’s ability to obtain governmental rezoning to increase the building density, the Company will be obligated to pay a rezoning payment ranging between $10,000 and $86,400. The seller has until August 2014 to obtain governmental rezoning. The payments due to the seller will be recorded as additional land basis when paid.
	The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141. The purchase price of the acquisition was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. The results of operations of Renaissance are included in the accompanying consolidated financial statements beginning on the date of acquisition. Pro forma information has not been presented because it is considered not material.
12.	Supplemental Guarantor Information
	Obligations to pay principal and interest on the Company’s senior subordinated notes are guaranteed fully and unconditionally by substantially all of the Company’s wholly owned subsidiaries. Separate financial statements of the guarantors are not provided, as subsidiary guarantors are 100% owned by the Company and guarantees are full, unconditional, and joint and several. Beginning in May 2004, certain of the Company’s subsidiaries no longer guarantee the debt. Supplemental condensed consolidating financial information of the Company’s guarantors is presented below.

10

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Balance Sheets

	June 30, 2005
										Consolidated
	WCI									WCI
	Communities,		Guarantor		Non-guarantor		Eliminating			Communities,
	Inc.		Subsidiaries		Subsidiaries		Entries			Inc.
Assets
Cash and cash equivalents	$	45,292	$	5,373	$	16,869	$	—		$	67,534
Restricted cash		110,713		54,243		7,853		—			172,809
Contracts receivable		703,496		389,416		—		—			1,092,912
Mortgage notes and accounts receivable		20,853		63,332		4,093		(13,195	)		75,083
Real estate inventories		1,041,024		305,399		391,020		—			1,737,443
Property and equipment		93,732		114,155		1,083		—			208,970
Investment in subsidiaries		775,371		—		—		(775,371	)		—
Other assets		318,588		176,854		40,623		(337,930	)		198,135
Total assets	$	3,109,069	$	1,108,772	$	461,541	$	(1,126,496	)	$	3,552,886
Liabilities and Shareholders’ Equity
Accounts payable and other liabilities	$	674,020	$	438,427	$	291,706	$	(338,114	)	$	1,066,039
Senior unsecured credit facility		255,700		—		—		—			255,700
Mortgages and notes payable		199,876		34,988		15,707		(13,011	)		237,560
Senior subordinated notes		985,903		—		—		—			985,903
		2,115,499		473,415		307,413		(351,125	)		2,545,202
Minority interests		—		—		14,114		—			14,114
Shareholders’ equity		993,570		635,357		140,014		(775,371	)		993,570
Total liabilities and shareholders’ equity	$	3,109,069	$	1,108,772	$	461,541	$	(1,126,496	)	$	3,552,886

11

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Balance Sheets
(continued)

	December 31, 2004
										Consolidated
	WCI									WCI
	Communities,		Guarantor		Non-guarantor		Eliminating			Communities,
	Inc.		Subsidiaries		Subsidiaries		Entries			Inc.
Assets
Cash and cash equivalents	$	84,839	$	9,413	$	7,721	$	—		$	101,973
Restricted cash		95,827		56,929		5,938		—			158,694
Contracts receivable		500,601		257,805		—		—			758,406
Mortgage notes and accounts receivable		33,901		72,140		277		(13,188	)		93,130
Real estate inventories		967,480		307,682		202,804		—			1,477,966
Property and equipment		63,153		113,174		262		—			176,589
Investment in subsidiaries		581,001		—		—		(581,001	)		—
Other assets		217,509		147,459		22,767		(222,101	)		165,634
Total assets	$	2,544,311	$	964,602	$	239,769	$	(816,290	)	$	2,932,392
Liabilities and Shareholders’ Equity
Accounts payable and other liabilities	$	534,043	$	395,213	$	170,835	$	(222,139	)	$	877,952
Senior unsecured credit facility		190,730		—		—		—			190,730
Mortgages and notes payable		122,406		33,644		7,338		(13,150	)		150,238
Senior subordinated notes		803,321		—		—		—			803,321
		1,650,500		428,857		178,173		(235,289	)		2,022,241
Minority interests		—		—		16,340		—			16,340
Shareholders’ equity		893,811		535,745		45,256		(581,001	)		893,811
Total liabilities and shareholders’ equity	$	2,544,311	$	964,602	$	239,769	$	(816,290	)	$	2,932,392

12

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Statements of Operations

	For the three months ended June 30, 2005
										Consolidated
	WCI									WCI
	Communities,		Guarantor		Non-guarantor		Eliminating			Communities,
	Inc.		Subsidiaries		Subsidiaries		Entries			Inc.
Total revenues	$	283,987	$	322,234	$	64,434	$	—		$	670,655
Total cost of sales		233,961		193,260		54,669		—			481,890
Gross margin		50,026		128,974		9,765		—			188,765
Total other income and expenses, net		48,743		10,466		6,831		—			66,040
Income before minority interests, income taxes and equity in income of subsidiaries		1,283		118,508		2,934		—			122,725
Minority interests		—		—		653		—			653
Income tax expense		432		45,361		977		—			46,770
Equity in income of subsidiaries, net of tax		74,451		—		—		(74,451	)		—
Net income	$	75,302	$	73,147	$	1,304	$	(74,451	)	$	75,302

	For the six months ended June 30, 2005
												Consolidated
	WCI											WCI
	Communities,			Guarantor		Non-guarantor			Eliminating			Communities,
	Inc.			Subsidiaries		Subsidiaries			Entries			Inc.
Total revenues	$	522,416		$	512,161	$	101,942		$	—		$	1,136,519
Total cost of sales		427,823			340,282		86,768			—			854,873
Gross margin		94,593			171,879		15,174			—			281,646
Total other income and expenses, net		100,439			19,393		12,766			—			132,598
(Loss) income before minority interests, income taxes and equity in income of subsidiaries		(5,846	)		152,486		2,408			—			149,048
Minority interests		—			—		(126	)		—			(126	)
Income tax (benefit) expense		(2,706	)		58,770		1,229			—			57,293
Equity in income of subsidiaries, net of tax		95,021			—		—			(95,021	)		—
Net income	$	91,881		$	93,716	$	1,305		$	(95,021	)	$	91,881

13

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Statements of Operations
(continued)

	For the three months ended June 30, 2004
												Consolidated
	WCI											WCI
	Communities,			Guarantor		Non-guarantor			Eliminating			Communities,
	Inc.			Subsidiaries		Subsidiaries			Entries			Inc.
Total revenues	$	181,594		$	127,762	$	22,663		$	—		$	332,019
Total cost of sales		159,906			72,698		21,517			—			254,121
Gross margin		21,688			55,064		1,146			—			77,898
Total other income and expenses, net		21,759			23,703		1,794			—			47,256
(Loss) income before minority interests, income taxes and equity in income of subsidiaries		(71	)		31,361		(648	)		—			30,642
Minority interests		—			—		(839	)		—			(839	)
Income tax (benefit) expense		(23	)		12,319		69			—			12,365
Equity in income of subsidiaries, net of tax		19,164			—		—			(19,164	)		—
Net income	$	19,116		$	19,042	$	122		$	(19,164	)	$	19,116

	For the six months ended June 30, 2004
												Consolidated
	WCI											WCI
	Communities,			Guarantor		Non-guarantor			Eliminating			Communities,
	Inc.			Subsidiaries		Subsidiaries			Entries			Inc.
Total revenues	$	313,663		$	261,006	$	22,663		$	—		$	597,332
Total cost of sales		261,012			172,649		21,517			—			455,178
Gross margin		52,651			88,357		1,146			—			142,154
Total other income and expenses, net		62,354			25,090		1,794			—			89,238
(Loss) income before minority interests, income taxes and equity in income of subsidiaries		(9,703	)		63,267		(648	)		—			52,916
Minority interests		—			—		(839	)		—			(839	)
Income tax (benefit) expense		(3,800	)		24,822		69			—			21,091
Equity in income of subsidiaries, net of tax		38,567			—		—			(38,567	)		—
Net income	$	32,664		$	38,445	$	122		$	(38,567	)	$	32,664

14

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Statements of Cash Flows

	For the six months ended June 30, 2005
													Consolidated
	WCI												WCI
	Communities,			Guarantor			Non-guarantor			Eliminating			Communities,
	Inc.			Subsidiaries			Subsidiaries			Entries			Inc.
Cash flows from operating activities:
Net income	$	91,881		$	93,716		$	1,305		$	(95,021	)	$	91,881
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes		7,912			1,571			(233	)		—			9,250
Depreciation and amortization		4,681			4,168			232			—			9,081
Losses (earnings) from investments in joint ventures		48			(1,186	)		42			—			(1,096	)
Minority interests		—			—			(126	)		—			(126	)
Stock-based compensation		2,767			—			—			—			2,767
Equity in earnings of subsidiaries		(95,021	)		—			—			95,021			—
(Contributions to subsidiaries) distributions from parent, net		(10,359	)		5,896			4,463			—			—
Changes in assets and liabilities:
Contracts, mortgage notes and accounts receivable		(136,123	)		(122,803	)		(716	)		(53,717	)		(313,359	)
Real estate inventories		(54,320	)		(19,333	)		(36,771	)		—			(110,424	)
Other assets		(116,948	)		(25,564	)		(1,681	)		115,829			(28,364	)
Accounts payable and other liabilities		132,595			41,825			40,522			(62,251	)		152,691
Net cash (used in) provided by operating activities		(172,887	)		(21,710	)		7,037			(139	)		(187,699	)
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired		(142,714	)		—			6,342			—			(136,372	)
Additions to property and equipment, net		(33,752	)		14,883			(499	)		—			(19,368	)
Distributions from (contributions to) investments in joint ventures, net		1,400			(147	)		(1	)		—			1,252
Net cash (used in) provided by investing activities		(175,066	)		14,736			5,842			—			(154,488	)
Cash flows from financing activities:
Net borrowings on senior unsecured credit facility		64,970			—			—			—			64,970
Net borrowings (repayments) on mortgages and notes payable		58,246			1,344			(1,631	)		139			58,098
Proceeds from issuance of senior subordinated notes		200,000			—			—			—			200,000
Redemption of a portion of 10 5/8 senior subordinated notes		(17,000	)		—			—			—			(17,000	)
Other		2,190			1,590			(2,100	)		—			1,680
Net cash provided by (used in) financing activities		308,406			2,934			(3,731	)		139			307,748
Net (decrease) increase in cash and cash equivalents		(39,547	)		(4,040	)		9,148			—			(34,439	)
Cash and cash equivalents at beginning of year		84,839			9,413			7,721			—			101,973
Cash and cash equivalents at end of period	$	45,292		$	5,373		$	16,869		$	—		$	67,534

15

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2005
(In thousands)

Condensed Consolidating Statements of Cash Flows
(continued)

	For the six months ended June 30, 2004
													Consolidated
	WCI												WCI
	Communities,			Guarantor			Non-guarantor			Eliminating			Communities,
	Inc.			Subsidiaries			Subsidiaries			Entries			Inc.
Cash flows from operating activities:
Net income	$	32,664		$	38,445		$	122		$	(38,567	)	$	32,664
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes		3,895			(7	)		(467	)		1,630			5,051
Depreciation and amortization		4,196			3,702			19			—			7,917
Losses (earnings) from investments in joint ventures		144			(870	)		—			—			(726	)
Minority interests		—			—			(839	)		—			(839	)
Stock-based compensation		688			—			—			—			688
Equity in earnings of subsidiaries		(38,567	)		—			—			38,567			—
(Contributions to subsidiaries) distributions from parent, net		(4,890	)		4,890			—			—			—
Changes in assets and liabilities:
Contracts, mortgage notes and accounts receivable		1,427			197,138			1,008			(25,203	)		174,370
Real estate inventories		(162,811	)		(44,617	)		(20,155	)		—			(227,583	)
Other assets		(23,238	)		(14,939	)		(640	)		56			(38,761	)
Accounts payable and other liabilities		29,950			(123,406	)		20,749			(1,658	)		(74,365	)
Net cash (used in) provided by operating activities		(156,542	)		60,336			(203	)		(25,175	)		(121,584	)
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired		(62,996	)		—			9,479			—			(53,517	)
Additions to property and equipment, net		(74	)		(24,778	)		(13	)		—			(24,865	)
Contributions to investments in joint ventures, net		(141	)		(439	)		—			—			(580	)
Net cash (used in) provided by investing activities		(63,211	)		(25,217	)		9,466			—			(78,962	)
Cash flows from financing activities:
Net borrowings on senior unsecured credit facility		87,000			—			—			—			87,000
Net borrowings (repayments) on mortgages and notes payable		92,269			(24,478	)		(1,963	)		25,175			91,003
Other		2,005			(1,826	)		(3,050	)		—			(2,871	)
Net cash provided by (used in) financing activities		181,274			(26,304	)		(5,013	)		25,175			175,132
Net (decrease) increase in cash and cash equivalents		(38,479	)		8,815			4,250			—			(25,414	)
Cash and cash equivalents at beginning of year		85,995			9,010			—			—			95,005
Cash and cash equivalents at end of period	$	47,516		$	17,825		$	4,250		$	—		$	69,591

16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three and six months ended June 30, 2005 compared to three and six months ended June 30, 2004

Overview

	For the three months ended				For the six months ended
(Dollars in thousands)	June 30,				June 30,
	2005		2004		2005		2004
Total revenues	$	670,655	$	332,019	$	1,136,519	$	597,332
Total gross margin (a)	$	188,765	$	77,898	$	281,646	$	142,154
Net income	$	75,302	$	19,116	$	91,881	$	32,664

(a) Our gross margin includes overhead expenses directly associated with each line of business. See the condensed consolidated statements of income for the details of other components that are part of consolidated income before income taxes for each period.

Our principal business lines include single- and multi-family (traditional) homebuilding, mid- and high-rise (tower) homebuilding and real estate services. For the three and six months ended June 30, 2005, 74.7% and 79.3% of revenue and 55.5% and 68.1% of gross margin, respectively, were derived from our combined homebuilding operations.

For the three and six months, total revenues increased 102.0% and 90.3% and gross margin increased 142.3% and 98.1%, respectively. The increase in revenues for the respective periods was driven primarily by the expansion of our traditional and tower homebuilding divisions, a large land sale, and to a lesser extent, growth in real estate services and amenity operations. The traditional homebuilding division benefited from the continued contributions from the Northeast U.S. and Mid-Atlantic U.S. markets. The increase in tower revenues for the respective periods was primarily a result of an increase in the number of towers recognizing percentage-of-completion revenues compared to last year. The real estate services division continues to deliver revenue growth as a result of increased transaction volume and average sales price per transaction.

Revenues, gross margin and net income were positively impacted by the sale of approximately 500 acres of undeveloped land in Jupiter, Florida for $100.0 million. This transaction produced approximately $77.0 million of gross margin.

In addition to the gross margin growth contributed from our principal business lines, net income for the three and six months was impacted by our revised capitalized interest calculations, by a reduction in other income and by an increase in selling, general and administrative expenses (SG&A).

Effective April 1, 2005, we revised our calculations of capitalized interest with respect to our traditional homebuilding and tower inventories, as prescribed by Statement of Financial Accounting Standards No. 34,Capitalization of Interest Cost. We now include the underlying developed land costs in our calculation of capitalized interest for tower residences under construction, and include the underlying developed land costs and in-process homebuilding costs in our calculation of capitalized interest for traditional homes under construction. Capitalization ceases upon substantial completion of each home or tower. The effect of the revision was to increase net income for the three months ended June 30, 2005 by approximately $4.8 million or $0.11 per diluted share, of which approximately $3.3 million or $0.07 per diluted share relates to the cumulative effects as of April 1, 2005. In addition, homebuilding and tower cost of sales for the three months ended June 30, 2005 includes approximately $4.4 million and $2.7 million, respectively, of previously capitalized interest related to homes closed and tower residences under construction, due to this revision.

17

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Homebuilding

Traditional homebuilding

	For the three months ended						For the six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	259,523		$	130,992		$	440,287		$	207,379
Gross margin	$	41,890		$	25,089		$	69,505		$	40,749
Gross margin percentage		16.1	%		19.2	%		15.8	%		19.6	%
Homes closed (units)		524			310			905			505
Average selling price per home closed	$	495		$	423		$	487		$	411
Lot revenues	$	12,674		$	92		$	18,932		$	2,139
Net new orders for homes (units)		444			705			1,160			1,362
Contract values of new orders	$	305,018		$	302,115		$	751,541		$	553,801
Average selling price per new order	$	687		$	429		$	648		$	407

	As of June 30,
	2005		2004
Backlog (units)		2,503		1,973
Backlog contract values	$	1,472,851	$	941,279
Average sales price in backlog	$	588	$	477
Active selling communities at end of the period		30		21

Traditional homebuilding revenues and home deliveries increased 98.1% and 69.0% and 112.3% and 79.2% for the three and six months, respectively. The increase in revenues and home deliveries for the respective periods was primarily due to the Florida market results. The Florida market contributed $86.8 million and $153.6 million to the increase in revenues and delivered an incremental 164 units and 289 units for the three and six months, respectively. The increase in Florida revenues and home deliveries was primarily due to construction delays caused by the hurricanes and permitting delays in late 2004 that pushed approximately 238 homes into the first six months of 2005 and the delivery of homes from our increased backlog. The Northeast U.S. and Mid-Atlantic U.S. markets contributed $41.8 million and $79.3 million to the increase in revenues and an incremental 50 units and 111 units to home deliveries for the three and six months, respectively.

Revenues were also favorably impacted in both periods due to the 17.0% and 18.5% increase in the average selling price per home closed, resulting from closing a larger portion of homes in our higher priced communities. In addition to a 13.0% and 13.8% increase contributed by the Florida market for the three and six months, respectively, the increase for the six months was positively impacted by the $1.0 million average selling price per home closed achieved in the Mid-Atlantic U.S. market.

Lot revenues increased $12.6 million and $16.8 million for the three and six months, respectively. The increase in lot revenues for the respective periods was primarily due to the initial sales from one of our communities located in the West Coast Florida region and an increase in lot sales from existing communities located in the Florida market. From time to time, we sell certain lots for custom homes directly to prospective residents or custom homebuilders as part of our strategy to serve a broad range of customers.

The decrease in the gross margin percentage was primarily due to amortization of the step-up in carrying value of in process real estate inventories associated with the acquisitions of Spectrum Communities and Renaissance Housing Corporation to reflect fair value at the time of purchase, a decline in gross margin from the Florida market and the revision of our capitalized interest calculations with respect to our traditional homebuilding inventories. Homebuilding cost of sales for the three months ended included $4.4 million of previously capitalized interest related to homes closed. Gross margin percentage for the

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Florida market decreased to 16.8% from 22.1% for the three months and to 16.2% from 21.4% for the six months ended primarily due to higher raw material and labor costs where home deliveries were delayed. Due to permitting delays, the timeframe from initial customer contract to home delivery increased by up to as much as 12 to 18 months. Consequently sales prices were locked in over a year or longer before delivery and our actual costs were higher than estimated at the time of home sale. The lingering effects of the hurricanes and permitting delays on Florida’s East Coast, as well as the purchase price accounting treatment of our Northeast U.S. and Mid-Atlantic U.S. homebuilding acquisitions, suppressed gross margins in the first half of 2005. Traditional homebuilding gross margins for the full year are expected to be in the 18% — 19% range.

Contract values of new orders increased 35.7% for the six months due in part to the 157 units and $142.4 million of new orders contributed by the Northeast U.S. and Mid-Atlantic U.S. markets. Contract values of new orders in the Florida market decreased 16.2% and increased 14.4% for the three and six months, respectively. The decrease in the Florida market for the three months ended was primarily due to the Company’s decision to temporarily reduce product offerings in certain communities where strong demand coupled with lot supply constraints caused by permitting, construction and certain raw material delays have extended backlog into 2006.

The 56.5% increase in backlog contract values reflects a 26.9% increase in backlog units combined with a 23.3% increase in the average sales price of homes under contract to $588 in 2005 compared to $477 in 2004. The increase in backlog contract values and units can be attributed to increased homebuilding sales and price increases for the six months ended combined with closing delays in the Florida market and, to a lesser extent, the contributions from the Northeast U.S. and Mid-Atlantic U.S. markets, which had a combined 425 units and $348.3 million in backlog at June 30, 2005.

We employ a wide range of sales incentives to market our homes to prospective buyers. These incentives are an important aspect of our sales and marketing of homes, and we may rely on them more heavily in promoting communities experiencing weaker demand or to promote the sale of completed unsold homes. Without the use of these marketing incentives, our ability to sell homes could be adversely impacted. The absorption of homes priced in excess of $1 million in certain second home luxury communities located in our Florida market continues to be slow.

19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Tower homebuilding

	For the three months ended						For the six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	228,889		$	145,211		$	442,413		$	283,876
Gross margin	$	60,187		$	46,572		$	117,418		$	86,145
Gross margin percentage		26.3	%		32.1	%		26.5	%		30.3	%
Net new orders (units)		320			197			511			349
Contract values of new orders	$	328,502		$	205,301		$	510,131		$	412,559
Average selling price per new order	$	1,027		$	1,042		$	998		$	1,182
Towers under construction recognizing revenue		18			13			18			13

	As of June 30,
	2005			2004
Cumulative contracts (units)		1,827			855
Cumulative contract values	$	2,020,973		$	1,046,766
Less: Cumulative revenues recognized		(1,098,737	)		(405,885	)
Backlog contract values	$	922,236		$	640,881
Average sales price in backlog	$	1,106		$	1,224

Tower revenues increased 57.6% and 55.8% for the three and six months ended, respectively. The increase for the respective periods was primarily due to the increase from the number of towers recognizing percentage-of-completion revenues, offset by a decrease in revenue from the sale of completed tower units.

The increase in towers recognizing percentage-of-completion revenues in the respective periods was primarily related to the increase in the number of buildings under construction recognizing revenue and the progression of completion in towers that were under construction in the comparable periods. The Tower division began construction on 12 towers during 2004 while only six towers were completed in 2004. During the quarter ended June 30, 2005, one new tower began recognizing percentage-of-completion revenues and two towers were completed. The decrease in revenue from the sale of completed tower units is primarily due to the reduction in the number of completed tower units in inventory available for sale. At the beginning of January 2004 and 2005, we had 139 and 84 completed tower units in inventory available for sale, respectively.

The decrease in gross margin percentage for the three and six months was primarily due to the change in the mix of towers under percentage-of-completion toward a broader range of moderately-priced, lower margin towers, the reduced revenue from the closing of completed tower units which averaged approximately 25.7% and 31.6% margin in 2005 compared to 36.5% and 35.6% for the respective periods in 2004 and revisions to our interest capitalization calculations for our tower inventories. Tower cost of sales for the three months ended included $2.7 million of previously capitalized interest related to towers under construction recognizing percentage-of-completion revenues.The comparable periods in 2004 also benefited from the realization of $7.6 million in construction and sales incentive cost savings on certain completed buildings with no significant cost savings recorded on completed towers during the current period.

Although the number of net new orders increased 62.4% and 46.4% for the three and six months, respectively, the average selling price per new order decreased 1.4% and 15.6%, for the same periods, primarily due to the Company’s planned shift in mix towards a more diversified moderately-priced tower product. The increase in the number of net new orders for the three and six months was primarily due to the conversion to firm contract of 212 units in five towers with a sales value of $207.5 million.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The 43.9% increase in backlog contract values was due to the 93.1% increase in cumulative contract values partially offset by a 170.7% increase in cumulative revenues recognized. The increase in cumulative contract values for the period July 1, 2004 to June 30, 2005 was primarily due to the $1.1 billion increase in net new contract orders offset by the delivery of $174.5 million in contracts associated with completed towers. The $692.9 million increase in cumulative revenues recognized relates to the progression of percentage-of-completion in new and existing towers offset by the reduction in cumulative contracts associated with the towers that were completed and delivered to customers during the period July 1, 2004 to June 30, 2005.

Real estate services

	For the three months ended						For the six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	49,688		$	41,500		$	87,608		$	70,271
Gross margin		9,445			7,729			15,532			11,928
Gross margin percentage		19.0	%		18.6	%		17.7	%		17.0	%

Real estate services revenues, including real estate brokerage, mortgage banking, and title operations for the three and six months increased 19.7% and 24.7%, respectively, primarily due to an increase in the volume of transactions and an increase in the average sales price per transaction associated with our Prudential Florida WCI Realty brokerage operations.

Prudential Florida WCI Realty brokerage transaction volume increased 15.9% to 3,703 closings from 3,195 in the second quarter of 2004, and 15.0% to 6,458 from 5,618 for the six months ended June 30, 2004. The increase in the number of transactions is due to the opening of new offices, the relocation of existing offices to larger locations, sales office acquisitions, and general growth in the real estate market. Compared to the three and six months in 2004, the average brokerage transaction price increased 9.7% and 15.2%, respectively, due to favorable real estate market conditions. The slight increase in gross margin percentage for the respective periods was primarily due to increased efficiency and prudent cost management in the real estate brokerage operations.

We anticipate revenue growth in real estate services throughout 2005 due to increased transaction volume and higher average sales prices within the Prudential Florida WCI Realty brokerage business and increased capture rates in the mortgage banking and title operations achieved through synergies with our homebuilding and realty brokerage divisions

Amenity membership and operations

	For three months end d						For six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	18,103		$	11,973		$	43,776		$	27,050
Gross margin		(2,047	)		(1,565	)		(2,277	)		725
Gross margin percentage		(11.3	%)		(13.1	%)		(5.2	%)		2.7	%

Total amenity membership and operations revenues increased 51.2% and 61.8% for the three and six months, respectively.

Equity membership revenues for the three and six months increased $4.2 million and $12.4 million, respectively. The increase for the six months ended is primarily due to the conversion from the deposit method to the cost

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

recovery method at two equity membership clubs located in the East Coast Florida region and the final sale of equity memberships at an existing club located in the West Coast Florida region. The increase for the three months ended was primarily due to the sale of luxury equity memberships from one our clubs located in the East Coast Florida region. In general, the sale of luxury equity memberships continue to be affected by reduced demand in the West Coast Florida region.

Membership dues and amenity service revenues increased $1.8 million and $4.2 million for the three and six months, respectively, due to the initial operations of new amenity facilities located throughout the Florida market and increasing annual membership fees.

The decline in the gross margin percentage for the six months was primarily due to the increased overhead costs associated with operating new and existing amenity facilities.

Amenity gross margin in 2005 will continue to be adversely impacted by the reduced availability of marina slips, slow demand for luxury equity memberships and increased start-up deficits associated with new amenity operations.

Land sales

	For the three months ended						For the six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Revenues	$	100,000		$	685		$	100,000		$	3,687
Gross margin		76,617			23			76,586			1,684
Gross margin percentage		76.6	%		3.4	%		76.6	%		45.7	%

In May 2005, we closed on the sale of a 506 acre parcel in Jupiter, Florida for $100.0 million in revenue and $76.6 million in gross margin resulting in an increase in land sales revenues and gross margin for the three and six months ended. Land sales are expected to continue in the future but will vary significantly in amount and timing.

Other income and expense

	For the three months ended						For the six months ended
(Dollars in thousands)	June 30,						June 30,
	2005			2004			2005			2004
Equity in losses (earnings) from joint ventures	$	39		$	220		$	(1,096	)	$	(726	)
Other income		(1,031	)		(8,608	)		(3,954	)		(16,626	)
Hurricane recoveries, net		(1,055	)		—			(1,861	)		—
Selling, general and administrative expense, including real estate taxes		61,066			42,220			114,657			81,555
Interest expense, net		1,606			10,144			15,760			18,534

Equity in earnings from joint ventures for the six months ended increased due primarily to positive contributions from our timeshare resort joint venture located in the West Coast Florida region. Other income for the three and six months ended decreased $7.6 million and $12.7 million, respectively, primarily due to the completion of collections from the sale of our Bighorn investment. We collected and recognized $14.7 million in the first half of 2004, from the sale of Bighorn. The remaining unpaid commitment of $1.8 million was collected in January 2005.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

During the six months ended June 30, 2005, we recorded an additional $3.1 million in insurance recoveries related to damages caused by Hurricane Ivan to our properties near Pensacola, Florida offset by additional costs of $1.2 million related to repairs associated with damages caused by the four hurricanes in the third quarter of last year. The insurance carrier is in the process of reviewing claims documentation. The final insurance recoveries cannot be determined until the claim review is completed.

Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 44.6% to $61.1 million and 40.6% to $114.7 million for the three and six months, respectively. General and administrative (G&A) costs increased 79.0% and 61.0% for respective periods primarily due to the increase in salaries and benefits related to increased staffing associated with the continued expansion of our business, the addition of our Northeast and Mid-Atlantic U.S. operations, an increase in estimated incentive compensation for achievement of Company performance goals, as well as a $2.5 million retirement bonus paid to our retiring Chief Executive Officer that was approved by the Board of Directors and expensed in February 2005. Marketing expenditures increased 13.2% and 25.0% for the respective periods due to the increase in advertising in new and existing communities, an increase in costs associated with opening sales offices, incremental costs from operating existing sales offices and the addition of our Northeast and Mid-Atlantic U.S. operations. As a percentage of total revenues, SG&A for the three months ended decreased to 9.1% in 2005 from 12.7% in 2004 and for the six months ended decreased to 10.1% from 13.7% for the same period in 2004.

For the three and six months ended, interest expense, net of capitalization, decreased 84.2% and 15.0%, respectively, due to an increase in interest incurred and capitalized.The 34.1% and 26.8% increase in interest incurred was primarily as a result of the increase in the weighted average outstanding debt balance for the respective periods in 2005 as compared to 2004. The increase in overall debt was primarily related to increased development activities associated with traditional and tower homebuilding products under contract for delivery in the next three to 24 months, land acquisitions, land improvements, amenity development activities and the acquisitions of Spectrum Communities in 2004 and Renaissance Housing Corporation in 2005. The increase in interest capitalized is primarily the result of the revised calculations of capitalized interest related to our traditional homebuilding and tower inventories effective April 1, 2005.

Liquidity and capital resources

We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We finance our land acquisitions, land improvements, homebuilding, development and construction activities from internally generated funds, credit agreements with financial institutions and other debt. As of June 30, 2005, we had $67.5 million of cash and cash equivalents and approximately $494.3 million available to draw under our senior unsecured credit facility.

We use cash flows from operations to build inventory additions related to single- and multi-family homes that are under contract for delivery during the next six to twelve months, land acquisitions, land improvements, amenity development activities, and additions to tower inventories. Including land acquisitions, net additions to real estate inventories were approximately $110.4 million for the six months ended June 30, 2005. During the first half of the year, we acquired approximately $114.0 million in additional land. We expect real estate inventories to increase as we are currently searching for and negotiating to obtain control of additional land for future communities.

For the six months, our cash flows from operations were impacted by a $334.5 million increase in contracts receivable reflecting the increase in percentage-of-completion revenue recognition in tower units under contract that are now being constructed. We expect to collect a portion of the remaining contracts receivable during the next three to six months as five tower closings are planned to occur, allowing delivery of units to residents. If we do not collect these contract receivables due to various contingencies, including buyer defaults, we may receive less cash than we expect. Historically, approximately 1% to 2% of non-cancelable contacts have resulted in

23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

cancellation or default. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.

For the year, approximately $136.4 million of cash was used in investing activities for the purchase of Renaissance Housing Corporation and $19.4 million to develop golf courses and club facilities and acquire corporate assets.

For 2005, financing activities provided net cash from borrowings on the senior unsecured credit facility, the revolving credit construction loan agreement, other project loans, exercise of stock options and the issuance of $200.0 million in senior subordinated notes in March 2005. The proceeds from the bond issuance were used to repay approximately $199.0 million of the outstanding balance of the senior unsecured credit facility.

We utilize a revolving credit construction loan to fund tower development activities. The facility provides for a $290.0 million revolving loan, which may increase to $340.0 million if certain conditions are met. At June 30, 2005 approximately $80.6 million was outstanding on this facility. In addition, the Company has a construction loan for another tower for up to $136.9 million. At June 30, 2005 approximately $98.4 million was outstanding on this loan.

We utilize a senior unsecured revolving credit facility primarily to fund land acquisitions, land improvements and home construction and for general corporate purposes. In January 2005 the revolving loan commitment was increased to $750.0 million. At June 30, 2005, approximately $255.7 million was outstanding on this loan.

Our wholly owned finance subsidiary, Financial Resources Group, Inc., utilizes a $23.0 million bank warehouse facility to fund mortgage loan originations. As of June 30, 2005, approximately $1.0 million was available for borrowing under the warehouse facility.

At June 30, 2005, we were in compliance with all of the covenants, limitations and restrictions in regards to our senior subordinated notes, senior unsecured credit facility, revolving credit construction loan facility and warehouse credit facility.

During the course of future operations, we plan to acquire developed and undeveloped land, which will be used in the homebuilding, tower and amenities lines of business. As of June 30, 2005, we had option contracts aggregating $210.5 million, net of deposits, to acquire approximately 3,500 acres of land. Our contractual obligation with respect to the option contracts is limited to the forfeiture of the related non-refundable deposits and/or letters of credit, which was $14.9 million at June 30, 2005.

On July 28, 2004, our Board of Directors authorized the Company to repurchase up to 500,000 shares of its common stock and to repurchase up to $50.0 million of its 10 5/8% senior subordinated notes (the Notes) from time to time, subject to certain parameters. During the quarter ended June 30, 2005, we repurchased $17.0 million principal amount of the Notes. We recognized expenses related to this debt redemption of approximately $1.5 million, which primarily represented the purchase premium above par value.

OFF-BALANCE SHEET ARRANGEMENTS

We selectively enter into business relationships through the form of partnerships and joint ventures with unrelated parties. These partnerships and joint ventures are utilized to acquire, develop, market and operate homebuilding, amenities and real estate projects. In connection with the operation of these partnerships and joint ventures, the partners may agree to make additional cash contributions to the partnerships pursuant to the partnership agreements. We believe that future contributions, if required, will not have a significant impact to our liquidity or financial position. If we fail to make required contributions, we may lose some or all of our interest in such partnerships or joint ventures. At June 30, 2005, one of our unconsolidated joint ventures had obtained third-

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

party financing of $20.5 million, of which $14.5 million is outstanding. Under the terms of the agreement, we provide a guarantee for our pro-rata share of the amount outstanding. Although the majority of our unconsolidated partnership and joint ventures do not have outstanding debt, the partners may agree to incur debt to fund partnership and joint venture operations in the future.

Standby letters of credit and performance bonds, issued by third party entities, are used to guarantee our performance under various contracts, principally in connection with the development of our projects and land purchase obligations. At June 30, 2005, we had approximately $55.1 million in letters of credit outstanding. Performance bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $119.0 million at June 30, 2005, are typically outstanding over a period of approximately one to five years.

CRITICAL ACCOUNTING POLICIES

The Company’s critical accounting policies are those related to (1) revenue recognition related to traditional and tower homebuilding; (2) contracts receivable; (3) real estate inventories and cost of sales; (4) warranty costs; (5) capitalized interest and real estate taxes; (6) community development district obligations; (7) impairment of long-lived assets; (8) goodwill; and (9) litigation. These policies are more fully described in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings, cash flows or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and beliefs concerning future events and are subject to risks and uncertainties about the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance.

These risks and uncertainties include the Company’s ability to compete in real estate markets where we conduct business; the availability and cost of land in desirable areas in our geographic markets and our ability to expand successfully into those areas; the Company’s ability to obtain necessary permits and approvals for the development of its lands; the availability of capital to the Company and our ability to effect growth strategies successfully; the Company’s ability to pay principal and interest on its current and future debts; the Company’s ability to maintain or increase historical revenues and profit margins; our ability to offer sales incentives at levels consistent with our past practices; the Company’s ability to collect contracts receivable and close homes in backlog, particularly related to buyers purchasing homes as investments; availability of labor and materials and material increases in labor and material costs; increases in interest rates and availability of mortgage financing; the level of consumer confidence; adverse legislation or regulations; unanticipated litigation or legal proceedings; natural disasters; and changes in general economic, real estate and business conditions. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements.

25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to update any forward-looking statements in this Report or elsewhere as a result of new information, future events or otherwise.

26

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on the variable rate portion of our debt.

Our Annual Report on Form 10-K for the year ended December 31, 2004 contains information about market risks under “Item 7A. Quantitative and Qualitative Disclosure about Market Risk.”

The following table sets forth, as of June 30, 2005, the Company’s debt obligations, principal cash flows by scheduled maturity (excluding interest payments) weighted average interest rates and estimated fair market values.

																				FM V at
	2005			2006			2007		2008			2009		There after			Total			6/30/05
Debt:
Fixed rate	$	—		$	—		$	—	$	—		$	—	$	983,000		$	983,000		$	1,030,433
Average interest rate		—			—			—		—			—		8.31	%		8.31	%
Variable rate	$	120,422		$	3,757		$	—	$	355,531		$	13,550	$	—		$	493,260		$	493,260
Average interest rate		5.29	%		5.44	%		—		5.02	%		—		—			4.95	%

* excludes premium of $2,903

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ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s report under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2005. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

In addition, there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s estimates and assumptions related to these proceedings, or due to the ultimate resolution of the litigation.

Item 4. Submission of Matters to a Vote of Shareholders

At the 2005 Annual Meeting of Shareholders of the Company held May 18, 2005, the following matters were voted upon:

1. Approval of amendment to Restated Certificate of Incorporation to eliminate staggered terms for directors.

For	Against		Authority Withheld
44,080,617		158,846		18,318

2.	Hilliard F. Eure, III, Alfred Hoffman, Jr. and Stewart Turley were re-elected as directors for a one year term expiring in 2006 as approved by the amendment to the Restated Certificate of Incorporation.
	The results of voting were as follows:

Nominee	For		Against		Authority Withheld
Hilliard F. Eure, III		43,280,445		0		977,336
Alfred Hoffman, Jr.		42,279,895		0		1,977,886
Stewart Turley		44,204,559		0		53,222

Item 6. Exhibits

     (a) Exhibits

3.1	Certificate of Incorporation of WCI Communities, Inc. (1)
3.2	Amended and Restated By-laws of WCI Communities, Inc.**
31.1	Rule 13a-14(a) certification by Jerry L. Starkey, Chief Executive Officer.**
31.2	Rule 13a-14(a) certification by James P. Dietz,, Chief Financial Officer.**
32.1	Section 1350 certification by Jerry L. Starkey, Chief Executive Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Section 1350 certification by James P. Dietz, Chief Financial Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*

29

PART II. OTHER INFORMATION
(Continued)

*	Pursuant to Commission Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
**	Filed herewith.
(1)	Incorporated by reference to the exhibits in the Form 8-K Current Report previously filed by WCI Communities, Inc. on May 24, 2005 (Commission File No. 1-9186).

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WCI COMMUNITIES, INC.
Date: August 8, 2005	/s/James P. Dietz
	James P. Dietz
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

30